Undercapitalization not a death sentence for start-up companies, say researchers

Washington, June 3 (ANI): The conventional wisdom that a lack of capital is a “death sentence” for start-up companies may not hold good any longer, with researchers at North Carolina State University suggesting that those with moderate levels of undercapitalization can still be successful.

“Our research shows that undercapitalization is not a death sentence for start-up ventures. There are things a venture can do to survive and succeed,” says Dr. David Townsend, an assistant professor of management, innovation and entrepreneurship at NC State who co-authored the study.

He basically says that start-up companies falling short of their fund-raising goals can take steps to minimize their cash outflows in order to stay viable.

“(Undercapitalized ventures) need to engage in management strategies focused on reducing their costs. For example, outsourcing certain development tasks and accounting responsibilities or exchanging services with other companies - saying we’ll build your Web site in exchange for a year’s worth of accounting services, etc.,” Townsend says.

The researchers also debunked the age-old belief that a great management team is the most important part of a venture company when it comes to securing investment in a start-up.

They agreed that a venture with an “A” or top-notch management team and an A technology was likely to meet its capitalization goal, but said that they had observed that the combination of a “B,” or less than ideal, management team with a B technology was also quite successful in meeting capitalization goals.

The researchers revealed that ventures that had an A management team but a B technology, or vice versa, were usually under-funded.

Townsend further said that B management teams with B technologies were probably more successful at meeting their capitalization goals because they were aware of their shortcomings, and modified their capitalization targets accordingly.

Similarly, according to the researcher, A management teams with B technologies, or vice versa, would often fall short of their capitalization targets because they would not modify their fund-raising goals, and consequently investors would not buy in at a sufficient level to fully fund the venture’s intended strategies. (ANI)